Cross-chain Lending
Last updated
Last updated
Lending protocols like Aave provide the ability to borrow against a select few of the most liquid tokens. In the decentralized finance world, Aave offers trustless and permissionless features. Over time, decentralized lending has proven to function well, but there are still many unmet needs in current lending protocols. Aave only caters to the borrowing capacity of the most liquid assets, leaving room for further expansion into other assets. Aave operates in a single-chain mode. While cross-chain collateralized lending has been achieved through token bridges, it requires the deployment of the Aave protocol on each public chain, which is costly and complex for users.
Interest Rate Model
Reserves: In lending protocols, there are rare instances where the value of a borrower's collateral may fall below the value of their debt, resulting in the borrower being undercollateralized. After the liquidation of undercollateralized borrowers, there may be remaining debt considered as bad debt. If bad debt accumulates, lenders may rush to withdraw their funds to avoid bearing the burden of bad debt. To mitigate this risk, following Compound's approach, the protocol extracts a portion of the interest as reserves. In case of bad debt, reserves are used for repayment. As long as the rate of accumulation of reserves exceeds bad debt, borrowers can avoid bearing the burden of bad debt. The proportion of interest extracted as reserves is called the reserve factor, denoted as RF. Different assets have different RFs. RF values range between 0 and 1 and can be adjusted through governance for balance.
Utilization Rate: The utilization rate represents the ratio of current borrowing funds to supplied funds. represents the utilization rate, represents borrowed funds, and represents remaining funds.
Interest Rate: Aave and Compound use a static linear interest rate model to determine the borrowing cost of the protocol. Simply put, when borrowing demand increases or supply decreases from the pool, interest rates rise, and when supply increases or borrowing demand decreases, interest rates fall. BRb represents the base borrowing rate. Uoptimal' represents the optimal utilization rate. BRslope1 represents the constant ratio relationship between the rate and utilization when the current utilization rate is lower than the optimal utilization rate. BRslope2 represents the constant ratio relationship between the rate and utilization when the current utilization rate is higher than the optimal utilization rate. BRc represents the current borrowing rate. The interest rate model is modeled after the mature practices of Aave and Compound, with the difference being that the interest earned by the reserve factor RF becomes a special borrower, joining the accumulated liquidity index to automatically earn interest, further enhancing the protocol's ability to resist bad debt risks.
Liquidity Rate: The liquidity rate is the interest rate that lenders providing loans should receive, with funds coming from the borrowing rate, denoted as LRc.
Accumulated Borrowing Index: Represents the cumulative index of interest payments that borrowers should make over time. represents the time interval from the current time to the last update, where Tyear represents a year's time in seconds. Denoted as BLt.
Accumulated Liquidity Index: Represents the cumulative index of interest that lenders should receive over time. represents the time interval from the current time to the last update, where Tyear represents a year's time in seconds. Denoted as CLt.
The interest rate model is modeled after the mature practices of Aave and Compound, with the difference being that the interest earned by the reserve factor RF becomes a special borrower, joining the accumulated liquidity index to automatically earn interest, further enhancing the protocol's ability to resist bad debt risks.
Tokenized Equity (oToken)
Tokenized Equity, or oToken, is a derivative token received by depositors after depositing funds. The amount of Tokenized Equity, or oToken, will automatically accumulate with the increase of CLt, representing the interest earned by the depositing user. SoTt is used to denote the quantity of scaled oToken that the user possesses at time t. is used to denote the token whose quantity represents the deposit/withdrawal amount made by the user. oTt is used to denote the quantity of oToken that the user possesses at time t. The quantity of Tokenized Equity, or oToken, is jointly determined by SoTt and CLt, as shown below:
User Deposit:
User Withdrawal:
Debt Token (dToken)
Debt Token, or dToken, represents the debt generated by borrowers when borrowing funds. The quantity of Debt Token, or dToken, will automatically accumulate with the increase of BLt, representing the interest that the borrowing user needs to pay. SdTt is used to denote the quantity of scaled dToken that the user possesses at time t. is used to denote the token whose quantity represents the borrowing/repayment amount made by the user. dTt is used to denote the quantity of dToken that the user possesses at time t. The quantity of Debt Token, or dToken, is jointly determined by SdTt and BLt, as shown below:
User Borrowing:
User Repayment:
Liquidation
Liquidation occurs when the value of a user's debt exceeds the protocol's specified over-collateralization requirement, resulting in the user's collateral being liquidated to repay the debt.
Risk Adjustment: Unlike traditional lending, which only considers the risk of decreased collateral value, the protocol also takes into account the risk of increased debt value. This is mitigated by raising the debt value using BF (greater than 1) and reducing the collateral value using CF (less than 1).
MEV Resistance: In traditional lending, the incentive for liquidation is to offer the borrower's collateral to liquidators at a fixed percentage discount, typically between 5% to 10%. Liquidators find this profitable but vulnerable to MEV, as miners and frontrunners can front-run the liquidator's transactions. To mitigate this form of MEV, the protocol allows liquidity providers to be eligible for discounts, while miners and others do not receive discounts.
Liquidation Cost: In traditional lending, liquidation usually requires external liquidity to process. This deterministic approach prevents liquidators from conducting liquidations at optimal prices due to factors such as slippage, price fluctuations, and fees. Leveraging the protocol's cross-chain single-token pools, liquidation can be facilitated via flash loans. Liquidators only need to cover gas costs.
Soft Liquidation: In traditional lending, liquidators are typically allowed to liquidate half of the debt at once, which is fixed at 0.5. However, this approach may be excessive and unfair if a smaller liquidation could restore the borrower's health. Therefore, the protocol adopts a soft liquidation model, where liquidation is limited to an amount not exceeding what is needed to restore the defaulter's health (plus an additional safety margin). This means that borrowers with minor defaults have less than half of their debt liquidated, while those with severe defaults have more than half liquidated.
Asset Isolation:
To meet the borrowing demand for long-tail assets, users are allowed to borrow against long-tail assets in isolation mode. Unlike regular assets, users must enter isolation mode, where long-tail assets can only be used as collateral and borrowing is limited to stablecoin assets with a debt ceiling. The debt ceiling effectively controls risks by preventing a sharp increase in defaults due to price fluctuations of long-tail assets.
In summary, the cross-chain lending application draws on mature practices from protocols like Aave and Compound while addressing their shortcomings. In comparison to Aave and Compound, this application enables users to seamlessly deposit assets on one chain and borrow on another, reducing user learning costs. For liquidators, it reduces liquidation costs and mitigates MEV. For the protocol, it enhances resilience against risks.
